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Financial Cleanup in the Works

Just as you're starting to digest health-care reform, along comes another sweeping regulatory restructuring, this time redrafting the laws governing lending and the financial markets. The stakes are high as lawmakers seek to avert future crises of the sort that brought us to our fiscal knees nearly two years ago. A reform law is likely to pass, possibly this summer -- despite partisan politics, intense lobbying and sometimes mind-numbing complexity. A Senate banking-committee bill was more than 1,300 pages long, addressing such issues as how to liquidate failed financial firms without putting taxpayers on the hook and how to make abstruse derivatives trading transparent.

One of the most controversial proposals would have the most direct impact on ordinary Americans: a new federal agency to oversee financial products, primarily loans and savings vehicles, with the goal of protecting consumers. Such an agency would have jurisdiction over credit cards, mortgages, payday loans and debt collection, for instance. Auto loans are exempt from the proposed agency's oversight in the House-passed version of the reform bill but may be included in the final law.

Supporters say an agency focused on consumers is needed, as existing regulators, scattered among seven different agencies, are more concerned with the safety and soundness of the institutions they regulate than the well-being of customers. But vocal opponents, including the U.S. Chamber of Commerce, worry that another layer of bureaucracy will stifle financial innovation and restrict access to credit. Douglas Elliott, of the Brookings Institution, who supports the formation of an agency, says opponents worry that the Consumer Finance Protection Agency "will be so focused on protecting consumers that it will try to stomp out all risk in financial transactions." For instance, says Elliott, it's plausible that such an agency could ban mortgage loans with down payments of less than 10%. "It will decide where you can be on the risk-reward scale."

In the end, the independent watchdog the Obama administration originally envisioned will likely lose some of its teeth, either housed as a bureau within the Federal Reserve or overseen by a panel of other financial regulators.

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Reform may grant shareholders a greater say on executive pay and will almost surely give them more clout when it comes to choosing corporate directors. Shareholders who want to nominate their own board candidates might soon be able to do so via the company proxy statement, saving the enormous expense that prohibits most shareholders from mounting proxy contests now. And even in uncontested elections, directors might serve only if they're elected by a majority of shareholders.